Following the third-quarter 2013 earnings announcement on December 20, 2012 for Research In Motion Ltd., (Nasdaq:RIMM), there was a huge downward revision of EPS estimates.

Third Quarter Highlights

GAAP net income in the third quarter of fiscal 2013 was $14 million or 3 cents per share compared with $265 million or 51 cents per share in the year-ago quarter. The company incurred a huge one-time income tax benefit of $226 million. Excluding this item, quarterly adjusted loss per share of 22 cents was better than the Zacks Consensus Estimate of a loss of 35 cents per share. Total revenue in the quarter was $2,727 million, down by a whopping 47.2% year over year but well ahead of the Zacks Consensus Estimate of $2,647 million. Quarterly gross margin was 30.4% well above 27.2% in the prior-year quarter. Quarterly operating loss was $230 million compared to an operating income of $328 million in the year-ago quarter.

Agreements of Analysts

For the fourth quarter of fiscal 2014, in the last seven days, out of the 29 estimates, 14 were revised downwards but at the same time there were seven upward revisions of EPS estimates. Likewise, for the first quarter of fiscal 2014, out of the 25 estimates, 10 have lowered their estimates while seven estimates moved in the opposite direction.

Currently, the Zacks Consensus EPS Estimate for the fourth quarter of fiscal 2013 is pegged at a loss of 29 cents, reflecting an annualized decline of 136.38%. Similarly, for the first quarter of fiscal 2014, the current Zacks Consensus EPS Estimate of a loss of 16 cents indicates an year-over-year increase of 56.54%.

We believe that stiff competition from Apple Inc.'s (Nasdaq:AAPL) iPhones and Google Inc.'s (Nasdaq:GOOG) Android-based smartphones coupled with a backdated operating system have caused downward revision of estimates. Moreover, delay in the launch of BlackBerry 10-based smartphones coupled with the lackluster performance of PlayBook tablets has resulted in further decrease in estimates.

Magnitude of Estimate Revisions

During the last 7 days, the current Zacks Consensus Estimate for the fourth quarter of fiscal 2013 was 2 cents above the loss per share of 27 cents of the previous Zacks Consensus Estimate. Similarly, for the first quarter of fiscal 2014, the current Zacks Consensus Estimate was 3 cents above the loss per share of 13 cents of the previous Zacks Consensus Estimate.

Likewise, for fiscal 2013, the current Zacks Consensus Estimate was 6 cents below the loss per share of $1.24 of the earlier Zacks Consensus Estimate. However, for fiscal 2014, in the last 7 days, the current Zacks Consensus Estimate was 4 cents above the loss per share of 52 cents of the previous Zacks Consensus Estimate.

Earnings Surprises

Research In Motion produced an earnings surprise of 13 cents or 37.14% in the last quarter with an average earnings surprise of a negative 150.48% in the trailing four quarters. There are downside potentials (essentially a proxy for future earning surprises) of 3.45% and 12.5%, respectively, for the ongoing quarter and the next quarter. However, for fiscal 2013, the Zacks Consensus Estimate's downside potential is 0.00% while 2014 contains a downside risk of 8.93%.

Our Recommendation

We maintain our long-term Neutral recommendation for Research In Motion. Currently, it has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

S&P Wary of NYSE-ICE Merger

Immediately after the announcement of the $8.2 billion acquisition of NYSE Euronext Inc. (NYSE:NYX) by IntercontinentalExchange Inc.(NYSE:ICE) last week, Standard & Poor's Ratings Services (S&P) has cast a concerned outlook on the merger, which is expected to culminate by the first half of 2013, subject to the fulfillment of regulatory compliances in the U.S. and Europe. The ratings agency is skeptical about the raised debt amid weak fundamentals.

Accordingly, S&P assigned an issuer credit rating of "A+/A-1" on NYSE. The company has also been kept under the CreditWatch with negative implications. A CreditWatch acts as a red flag and allows a company to monitor its actions before causing a detrimental effect on ratings.

CIO, CTO & Developer Resources

S&P's concern hovers around NYSE's inflated debt position, which the company plans to carry in the merged company as well. Higher debt and lower working capital in the first half of 2012 also impelled the ratings agency to downgrade NYSE's outlook to negative from stable, in August 2012.

Further, with a long-term debt of $2.5 billion at the end of the first nine months of 2012, NYSE bears the brunt of higher borrowing costs, which further constricted the operating margins to about 33% during the same period from 9% in the year-ago period. At present, higher debt and capital expenditure has led NYSE's debt-to-EBITDA ratio to deteriorate to 2.4x at the end of September 2012 from 1.6x at 2011-end, which again underscores ample financial and operating risks.

The rating agency is wary of NYSE's liquid assets, which may hardly cover the operating expenses for three months. At such a juncture when heavy capital expenditure is expected until at least mid-2013, consistent dividends and share buybacks amidst declining operating margins and operating cash flow only augment business risks. Hence, S&P does not expect any rating upgrades over the next two years.

The financial risks from the higher debt obligations do not make this potentially strong merger any less risky. This is due to the fact that IntercontinentalExchange plans to squeeze all of its cash of $1.0 billion and raise another $1.8 billion from its revolving credit facility. This leaves the combined entity with a debt burden of about $4.7 billion and debt-to-EBITDA ratio of 2.2x, according to the S&P, which remains in a perilous state.

Nevertheless, the ratings agency is optimistic about ICE Clear Europe providing clearing services to NYSE Liffe, as part of the merger. This clearing pact allows NYSE to diminish the cost and risk of building its own clearinghouse in London and mutually benefit from the diverse product portfolio. Moreover, S&P believes that NYSE is making efforts to reduce its debt obligations through refinance and other activities. Even post merger, the joint entity has the potential to improve its operating cash flow and produce cost synergies worth about $300 million by 2014.

However, these actions would take quite a long time given the company's capital and other extraordinary cost requirements of about $150 million in 2013. Hence, a risky financial and operating leverage could also shake investor confidence, and call for an appropriate check and control system instantaneously.

IntercontinentalExchange carries a Zacks #3 Rank, which implies a Hold rating in the short term, while the long-term recommendation remains Neutral. However, NYSE holds a Zacks #4 Rank, which translates into a short-term Sell rating, while the long-term recommendation remains Underperform.

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